SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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In the Matter of the Application of:
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
MASSACHUSETTS FINANCIAL SERVICES COMPANY
File No. 812 - 13482
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THIRD AMENDED AND RESTATED APPLICATION FOR AN ORDER PURSUANT TO
SECTION 6(c) OF THE INVESTMENT COMPANY ACT OF 1940 FOR EXEMPTIONS
FROM SECTION 19(b) OF THE ACT AND RULE 19b-1 THEREUNDER
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Please direct all communications, notices and orders to:
Mark N. Polebaum, Esq.
Executive Vice President and General Counsel
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
AND
Gregory D. Sheehan, Esq.
Ropes & Gray LLP
One International Place
Boston, MA 02110-2624
This document contains 35 pages.
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UNITED STATES OF AMERICA
BEFORE THE
SECURITIES AND EXCHANGE COMMISSION
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In the Matter Of THIRD AMENDED AND RESTATED
APPLICATION PURSUANT TO
MFS GOVERNMENT MARKETS INCOME TRUST SECTION 6(c) OF THE
MFS INTERMEDIATE INCOME TRUST INVESTMENT COMPANY ACT OF
MASSACHUSETTS FINANCIAL SERVICES COMPANY 1940, AS AMENDED, FOR AN
ORDER OF EXEMPTION FROM
SECTION 19(b) OF THE ACT AND
File No. 812 - 13482 RULE 19b -1 THEREUNDER.
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MFS Government Markets Income Trust and MFS Intermediate Income Trust (the
"Applicant Funds") and Massachusetts Financial Services Company ("MFS" or the
"Adviser")(the Applicant Funds together with the Adviser, the "Applicants") and
each registered closed-end investment company existing as of, or created or
acquired after, the submission of this third amended and restated application
for an Order (defined below) for which MFS (including any successor in
interest)(1) or an entity controlling, controlled by or under common control
(within the meaning of Section 2(a)(9) of the Investment Company Act of 1940, as
amended (the "Act")) with MFS serves as investment adviser (such entities,
together with MFS, the "Investment Advisers") that decides in the future to rely
on the requested relief(2) (such investment companies, together with the
Applicant Funds, are referred to as the "Funds") hereby apply for an order (the
"Order") of the
________________
(1) A successor in interest is limited to entities that result from a
reorganization into another jurisdiction or a change in the type of business
organization.
(2) All existing registered closed-end investment companies that
currently intend to be able to rely on the requested Order (as defined below)
are named as Applicants, and any closed-end investment company that may rely on
the order in the future will satisfy each of the representations in the
application and comply with the terms and conditions of this Application.
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Securities and Exchange Commission (the "Commission") pursuant to Section 6(c)
of the Act providing Applicants an exemption from the provisions of Section
19(b) of the Act and Rule 19b-1 thereunder, as more fully set forth below.
I. APPLICANTS.
Each Applicant Fund is a closed-end management investment company
registered under the Act and has only issued common shares. MFS Government
Markets Income Trust was organized as a business trust under the laws of The
Commonwealth of Massachusetts on March 27, 1987. MFS Intermediate Income Trust
was organized as a business trust under the laws of The Commonwealth of
Massachusetts on December 30, 1987. Shares of each Applicant Fund currently
trades on the New York Stock Exchange (the "NYSE"). Set forth below in tabular
format is descriptive information regarding the Applicant Funds:
Fund Investment Objective Summary Strategy
---- -------------------- ----------------
MFS Government Markets Income To provide high current Invests 80% in U.S. and non-U.S.
Trust income, but may also consider government securities. May also invest
capital appreciation. in other types of debt instruments.
Invests substantially in investment
grade debt instruments.
MFS Intermediate Income Trust To provide high current Invests primarily in debt instruments.
income, but may also consider Invests substantially in investment
capital appreciation. grade debt instruments. Average
portfolio life is normally between three
and ten years.
MFS, a Delaware corporation that is a registered investment adviser under
the Investment Advisers Act of 1940, as amended, acts as the Applicant Funds'
investment adviser. MFS (or its affiliates) currently serves as the investment
adviser to investment
3
companies and various individual and institutional clients with combined assets
under management of approximately $134 billion as of December 31, 2008. MFS is a
wholly-owned subsidiary of Sun Life of Canada (U.S.) Financial Services
Holdings, Inc., which is an indirect wholly-owned subsidiary of Sun Life
Financial Inc. (a diversified financial services company).
II. RELIEF REQUESTED.
Section 19(b) of the Act provides that it shall be unlawful, in
contravention of such rules, regulations, or orders as the Commission may
prescribe as necessary or appropriate in the public interest or for the
protection of investors, for any registered investment company to distribute
long-term capital gains, as defined in the Internal Revenue Code of 1986 (the
"Code"), more often than once every twelve months. Rule 19b-1 under the Act
generally provides that no registered investment company which is a "regulated
investment company" as defined in Section 851 of the Code shall make more than
(i) one distribution of long-term capital gains, as defined in the Code, in any
one taxable year of the company, (ii) one additional net long-term capital gains
distribution made in whole or in part to avoid excise tax under Section 4982 of
the Code, and (iii) one supplemental "clean-up" distribution of net long-term
capital gains pursuant to Section 855 of the Code not in excess of 10% of the
total amount distributed for such taxable year.
Applicants hereby request an order pursuant to Section 6(c) of the Act
granting an exemption from Section 19(b) of the Act and Rule 19b-1 thereunder to
permit each Fund to make periodic long-term capital gains distributions (as
described in Section 852(b)(3)(C) of the Code) as often as monthly in any one
taxable year in respect of its
4
common stock, and as often as distributions are specified in or pursuant to the
terms thereof in respect of its preferred stock, if any, so long as it maintains
in effect a policy to distribute (i) with regard to its common stock, a fixed
percentage per year of the average net asset value ("NAV") per share of its
common stock, a fixed percentage per year of the market price per share of its
common stock, or a fixed dollar amount per common share in accordance with a
level-distribution plan, and (ii) with regard to each series of its preferred
stock, a specified percentage, whether such specified percentage is determined
at the time the preferred stock is initially issued, pursuant to periodic
remarketing or auctions or otherwise.(3) With respect to each Fund, a
distribution policy described above and adopted by such Fund is referred to as a
"Distribution Policy."
If the total distributions required by a Fund's Distribution Policy exceed
the Fund's investment income and net capital gains realized in the current year
without regard to any capital loss carryforwards, the excess will be treated as
a return of capital. If a Fund's net investment income, net short-term realized
gains and net long-term realized gains for any year exceed the amount required
to be distributed under the applicable Distribution Policy, the Fund intends to
pay such excess once a year but may, in its discretion, retain and not
distribute the portion of such excess comprising net long-term
___________________
(3) While a Fund's common stock typically is listed and trades on an exchange
such as the NYSE, its preferred stock, if any, typically is not listed or traded
on an exchange but instead trades at periodic auctions or remarketings. The
periodic dividend rate for any particular series of preferred stock, if any, of
a Fund may be either fixed by the trustees of the issuing Fund or established
periodically in auctions or remarketings or with reference to an objective
index. The main difference between auctions and remarketings is the dividend
determination mechanism. The auction process that establishes the dividend rates
for preferred stock involves one-sided bidding, in which investors submit bids
into auctions that are administered by an auction agent. The remarketing process
that establishes the dividend rates for preferred stock is a two-sided procedure
involving discussions between the remarketing agent, existing holders and
potential buyers, which result in the establishment by the remarketing agent of
a dividend rate. Auctions and remarketings are both designed to result in the
lowest dividend rate that will enable the preferred stock to trade in the
auction or remarketing at its original offering price, subject to a stipulated
maximum and minimum dividend rate scale. The dividend rate determined at the
auction or remarketing will apply to all shares subject to such auction or
remarketing during the same dividend period. The Applicant Funds do not use any
auction agents or remarketing agents that are affiliated with the Adviser.
5
capital gains or, to the extent not inconsistent with satisfaction of the
distribution requirement of Code Section 852(a), net investment income. A Fund's
Distribution Policy could require a dividend to be paid, notwithstanding any
capital loss carryforwards, including when the Fund realizes net capital gains
for the current year (prior to taking into account such carryforwards). This
would result in a distribution that is economically a return of capital, but
would be treated as an ordinary dividend for tax purposes.
The Distribution Policy with respect to each Fund's common stock will be
initially established, reviewed and approved by the board of trustees of such
Fund (the "Board"). Prior to making distributions in reliance on this Order,(4)
the Board of a Fund, including a majority of the trustees who are not
"interested persons" of the Fund, as defined in Section 2(a)(19) of the Act (the
"Independent Trustees"), will have:
(1) approved the Fund's adoption of the Distribution Policy;
(2) requested and evaluated, and MFS, the Funds' investment adviser,
shall have furnished, such information as may be reasonably necessary for
an informed determination of whether the Distribution Policy should be
adopted and implemented;
______________________
(4) In 2007, the Board of MFS Government Markets Income Trust and MFS
Intermediate Income Trust adopted a level-distribution policy for each Fund's
common shares. In adopting these distribution policies, the Board complied with
all of the representations made in this Application. At the time, each of the
two Funds had substantial capital loss carryforwards and realized and unrealized
net capital losses in its portfolio that the Adviser believed, absent unusual
changes to current market conditions, would be sufficient to offset the Fund's
long-term capital gains for a period of time. The Adviser believes that each of
these Funds will be able to continue to make distributions in accordance with
its respective plan for the time being without exceeding applicable limits on
long-term capital gains distributions under the Act. These funds will only make
distributions of long-term capital gains more frequently than the applicable
limits under the Act in the event the requested Order is granted. Any such
distributions made in reliance on the Order will comply with the terms and
conditions of this Application.
6
(3) determined that adoption and implementation of the Distribution
Policy is consistent with the Fund's investment objective(s) and policies
and in the best interests of the Fund and its shareholders, after
considering the information in (2) above, including, without limitation:
(i) the purpose(s) of the Distribution Policy as stated in this
application,
(ii) information about any potential or actual conflicts of
interest that the Investment Adviser, any affiliated person
of the Investment Adviser, or any other affiliated person of
the Fund may have relating to the adoption or implementation
of the Distribution Policy,
(iii) whether the rate of distribution under the Distribution
Policy will exceed the Fund's expected total return (in
relation to NAV); and
(iv) the reasonably foreseeable material effects of the
Distribution Policy on the Fund's long-term total return (in
relation to market price and NAV);
(4) approved the adoption of compliance policies and procedures in
accordance with Rule 38a-1 under the 1940 Act that:
(i) are reasonably designed to ensure that all notices required
to be sent to Fund shareholders pursuant to section 19(a) of
the Act and Rule 19a-1 thereunder (each a "19(a) Notice")
include the disclosure required by Rule 19a-1 and by
condition 2(a) as set forth under the section "Applicants
Conditions" below, and that all
7
other communications by the Fund or its agents, as described
in condition 3(a) as set forth under the section "Applicants
Conditions" below, about the distributions under the
Distribution Policy include the disclosure required by
condition 3(a) as set forth under the section "Applicants
Conditions" below, and
(ii) require the Fund to keep records that demonstrate its
compliance with all of the conditions of this Order and that
are necessary for the Fund to form the basis for, or
demonstrate the calculation of, the amounts disclosed in its
19(a) Notices; and
(5) recorded the information, pursuant to representation (3) above,
considered by it and the basis for its approval of the Distribution Policy
in its meeting minutes, which must be made and preserved for a period of
not less than six years from the date of such meeting, the first two years
in an easily accessible place or such longer period as may otherwise be
required by law.
III. JUSTIFICATION FOR THE REQUESTED RELIEF.
Section 6(c) of the Act provides that the Commission may exempt any person
or transaction from any provision of the Act or any rule under the Act to the
extent that such exemption is necessary or appropriate in the public interest
and consistent with the protection of investors and the purposes fairly intended
by the policy and provisions of the Act. For the reasons set forth below,
Applicants submit that the requested exemption from Section 19(b) of the Act and
Rule 19b-1 thereunder would be consistent with the standards set forth in
Section 6(c) of the Act, and would be in the best interests of the Applicants
and their respective shareholders.
8
A. General Public Policy Considerations.
A large number of registered closed-end investment companies have adopted
level distribution plans like the ones described in this Application. Several of
those same registered closed-end investment companies have requested, and been
granted, exemptive relief from Section 19(b) and Rule 19b-1 for both their
common and preferred stock. There is no public policy reason why investors, with
full disclosure of the nature of the periodic dividends and distributions,
should not have the opportunity to select a registered closed-end investment
company, such as the Funds, with a distribution plan, such as a Distribution
Policy adopted by a Fund, calling for periodic fixed cash dividends and
distributions as described above, with respect to its common and/or preferred
shares, of net investment income and realized capital gains (including realized
long-term capital gains), with a Fund returning capital to the extent that net
investment income and realized capital gains plus undistributed earnings and
profit from prior years are insufficient to meet the dividend and distributions
requirements under its Distribution Policy.
By limiting the number of net long-term capital gain distributions that the
Funds may make with respect to any one year, the normal operation of Rule 19b-1
generally prevents the use of realized long-term capital gains as a source of
the monthly distributions made under a Fund's Distribution Policy for its common
stock (as well as the use of such gains in periodic distributions specified by
or pursuant to the terms of the Fund's preferred stock, if any). As a result,
even though realized net long-term capital gains otherwise might be
available,(5) to the extent net investment income and realized net short-term
capital gains are insufficient to make up an entire distribution, Rule 19b-1
__________________
(5) The IRS treats distributions in excess of the amount that can be designated
as capital gain dividends as taxed to shareholders as ordinary income, to the
extent those distributions do not exceed the fund's earnings and profits.
Internal Revenue Code of 1986, as amended, Sec. 316(a), Treas. Reg. 1.316-2(a).
9
seemingly would force part of a monthly distribution to be funded with a return
of capital. However, as described below, tax accounting standards provide that a
Fund may not characterize any distribution as a return of capital so long as it
has any undistributed income, which would mean that the sources of any periodic
distribution could not be finally determined until the close of the Fund's
taxable year. Moreover, in the case of a Fund with only common shares
outstanding, tax rules require that the total annual return of capital, if any,
must be distributed so that the amounts constitute the same proportion of each
of the twelve monthly distributions to common shareholders.(6) As a result, the
long-term capital gains that exceed the common stock's fixed monthly
distributions are either added as an "extra" to one of the permitted capital
gains distributions on the common stock, thus exceeding the total annual amount
called for by the Fund's Distribution Policy, or retained by the Fund (with the
Fund potentially liable for taxes on such retained amount).
Applicants further note that, by limiting the number of net long-term
capital gain distributions that a Fund may make with respect to any one year
without exemptive relief, Rule 19b-1 would potentially prevent implementation of
a Distribution Policy for any Fund that expects to realize capital gains,
without reference to when these gains are recognized during the course of a
year. From an accounting point of view, in the interpretation of Rule 19b-1 by
the Accounting Standards Executive Committee (the "Committee") of the American
Institute of Certified Public Accountants,(7) a Fund is
__________________
(6) Treas. Reg. Sec. 1.316-2(b). Where a Fund has preferred shares as well as
common shares outstanding and it makes distributions to shareholders in excess
of its current and accumulated earnings and profits in any taxable year, the
available earnings and profits are allocated first to the distributions made to
holders of preferred shares, and only thereafter to distributions made to
holders of common shares (such latter earnings and profits are then allocated as
described above).
(7) American Institute of Certified Public Accountant: Statement of Position
93-2, February 1, 1993.
10
required to estimate, based on its sources and amounts of various types of
income to date, what portion of each distribution is from income of any type or
accumulated undistributed earnings and profits and what portion is a return of
capital. Under the accounting interpretations of the Committee, a Fund may not
characterize as a return of capital any distribution so long as it has any
undistributed income.
In addition, IRS Revenue Ruling 89-81, 1989-1 C.B. 226 ("Revenue Ruling
89-81") requires regulated investment companies having more than one class of
stock to make designations of various types of income (such as taxable,
tax-exempt, and capital gains) to each class of stock in proportion to the total
amount of dividends distributed to each class. For regulated investment
companies with classes of both common stock and preferred stock outstanding,
such as certain of the Funds, this requirement to allocate capital gains
proportionately to the preferred stock could, under certain circumstances,
require a Fund to make a greater number of capital gain distributions in respect
of such preferred stock than is permitted under Section 19(b) and Rule 19b-1.
This Application requests an exemption from Section 19(b) and Rule 19b-1 to
permit the Funds to satisfy the requirements of Revenue Ruling 89-81 with
respect to any Fund with more than one class of stock outstanding.
Under certain circumstances, a Fund can comply with both Revenue Ruling
89-81 and Rule 19b-1 if it is required to make only one distribution of
long-term capital gains in a tax year to satisfy the requirements of Revenue
Ruling 89-81. The interaction of Revenue Ruling 89-81 and Rule 19b-1 can be
illustrated through a simple example of a Fund that has two classes of stock -
namely, common stock and one series of preferred
11
stock.(8) If, during a given tax year, the Fund paid a total of $8,000,000 in
ordinary dividends on its common stock and $2,500,000 in ordinary dividends on
its preferred stock, the applicable ratio for the preferred stock would be
23.8%. If during this same tax year, the Fund realized $200,000 in long-term
capital gains, Revenue Ruling 89-81 would require the Fund to designate $47,600
(23.8% of $200,000) of such capital gains to the preferred stockholders, with
the remaining $152,400 of these capital gains designated to common stockholders.
In this example, the $47,600 of long-term capital gains designated to
preferred stockholders would be included in one or more of the regular dividends
paid to preferred stockholders. Assuming that the preferred stock established
its dividend rates through auctions, prior to the auction at which the dividend
rate is determined for the first dividend period that includes a long-term
capital gains distribution, the dividend on the preferred stock for that period
would be designated as long-term capital gains up to a maximum long-term capital
gain distribution of $47,600.
If, using this same example, prevailing market conditions required that
preferred stockholders receive $50,000 in a single dividend period, the entire
$47,600 of long-term capital gains would be issued in that single dividend
distribution. Of the $50,000 dividend paid to preferred stockholders for that
dividend, $47,600 would take the form for federal income tax purposes of a
long-term capital gains distribution while the remaining $2,400 would be
characterized for federal income tax purposes as an ordinary taxable dividend.
The preferred stockholders will still have received the $50,000 aggregate cash
dividend as expected; unlike the portion of the dividend designated as an
________________
(8) In the case in which a Fund has multiple series of
preferred shares, the allocations described in this example would apply in the
same manner to each series of the preferred shares.
12
ordinary taxable dividend, the capital gains will of course be taxable. In this
example, since the entire amount of the long-term capital gains to be
distributed under Revenue Ruling 89-81 is included in a single dividend, the
distribution does not violate Rule 19b-1's prohibition on multiple distributions
of long-term capital gains in any tax year.
However, if the circumstances were to vary slightly, it is possible that
the Fund, in this example, would not be able to distribute the entirety of the
proportionate share of long-term capital gains required to be distributed to its
preferred stockholders in a single distribution. For instance, if the Fund had
realized long-term capital gains of $1,000,000 (instead of $200,000), the
portion of this gain that Revenue Ruling 89-81 would require be designated to
the preferred stockholders would be $238,000 (23.8% of $1,000,000). Prior to the
next auction, the Fund would determine that the upcoming dividend would be
designated as a long-term capital gains distribution up to a maximum of
$238,000. Assuming again that market conditions resulted in the preferred
stockholders demanding in the aggregate $50,000 per single dividend period
(which amount could be affected in turn by the prospect of taxable capital
gains), it would take five separate dividend distributions to distribute fully
the long-term capital gains required to be distributed by Revenue Ruling
89-81.(9)
This example of a Fund requiring five auctions to distribute long-term
capital gains to preferred stockholders to comply with Revenue Ruling 89-81
illustrates a conflict between Revenue Ruling 89-81 and Rule 19b-1, and the
consequent need for exemptive relief from Section 19(b) and Rule 19b-1 to permit
a Fund to make multiple long-term capital gains distributions to preferred
stockholders beyond that which Rule
________________
9) All of the first four distributions would be designated as long-term capital
gains. With respect to the fifth distribution, $38,000 would constitute
long-term capital gains and the remaining $12,000 would be ordinary income.
Again, this would have no impact on preferred stockholders from a cash
perspective.
13
19b-1 technically allows. While Rule 19b-1 does give regulated investment
companies some flexibility with respect to long-term capital gains
distributions, the aforementioned scenario illustrates that a Fund could use all
of the exceptions provided by Rule 19b-1 and, because it would need to make
further distributions to the different series of its preferred stockholders, be
unable to comply with Revenue Ruling 89-81, and Section 19(b) and Rule 19b-1.
The requested relief would permit the Funds to make the payments specified
in their Distribution Policies without exposing the Funds' shareholders to
unintended adverse consequences described above.
B. Shareholder Interests and Market Perception.
Applicants believe that investors in the common shares of the Funds may
prefer an investment vehicle that provides regular/monthly distributions and a
steady flow of predictable income, and note that other closed-end funds have
adopted level distribution plans to respond to this investor preference.
Accordingly, certain investors may generally expect certain of the Funds to have
a similar regular/monthly distribution plan.
In addition, in the case of common stock of closed-end funds, such common
stock often trades in the marketplace at a discount to its net asset value. At
times, shareholders of certain closed-end funds trading at discounts have made
it increasingly clear to the boards of directors and management of their funds
that serious steps need to be taken toward addressing the discount. To try to
reduce the persistent discounts at which their shares trade, many closed-end
funds have adopted level distribution plans, which call for fixed monthly or
quarterly distributions to shareholders. In the view of the Applicants, the
discount at which certain of the Funds' common stock may trade also may be
reduced
14
if such Funds similarly adopt a level distribution plan which would
require such Funds to pay capital gains dividends with respect to their common
stock more frequently than is permitted under Rule 19b-1.
C. Each Fund's shareholders would receive information sufficient to
inform them of the nature of the payments under a Distribution Policy
for the common and/or preferred stock.
One of the concerns leading to the enactment of Section 19(b) and adoption
of Rule 19b-1(10) was that shareholders might be unable to distinguish between
frequent distributions of capital gains and dividends from investment income.
However, the Distribution Policies, including the fact that the distributions
called for by the policies may include returns of capital to the extent that a
Fund's net investment income and net capital gains are insufficient to meet the
fixed dividend, will be fully and repeatedly described in the Funds' periodic
communications to its shareholders, including the periodic report to
shareholders next following the institution of any such policy.
In accordance with Rule 19a-1 under the Act, a 19(a) Notice showing the
anticipated source or sources of the distribution, i.e., net income, net
realized capital gains and/or returns of capital, would accompany each
distribution (or the confirmation of the reinvestment thereof under a Fund's
common stock dividend reinvestment plan). Each 19(a) Notice, in addition to the
information required by Section 19(a) and Rule 19a-1 will also include the
information set forth under the sub-heading "Disclosures to Shareholders" in the
"Applicants' Conditions" section below. The eventual actual amount and source or
sources of distribution received during the calendar year will be
__________________
((10) See Securities and Exchange Commission 1966 Report to Congress
on Investment Company Growth (H.R. Rep. No. 2337, 89th Cong., 2d Sess. 190-95
(1966) (the "Report")); S. Rep. No. 91-184, 91st Cong., 1st Sess. 29 (1969);
H.R. Rep. No. 91-1382, 91st Cong., 2d Sess. 29 (1970).
15
included on each Fund's IRS Form 1099-DIV reports of distributions during the
year, which will be sent early the following year to each shareholder of record
who received distributions (including shareholders who have sold shares during
the year). The sources of the distributions provided on IRS Form 1099-DIV may
significantly differ from the sources anticipated on the 19(a) Notice. This
information on an aggregate basis also would be included in each Fund's annual
report to shareholders.
Applicants accordingly believe that each Fund's shareholders will be
provided sufficient information to understand that their periodic distributions
are not tied to a Fund's net investment income and realized capital gains and
may not represent yield or investment return.
D. Rule 19b-1, under certain circumstances, gives rise to improper
influence on portfolio management decisions, with no offsetting
benefits to shareholders.
Another concern leading to the adoption of Rule 19b-1 was that frequent
capital gains distributions could impose pressure on management to realize
capital gains on a regular and frequent basis and at a time when pure investment
considerations would dictate not doing so.(11) However, when applied to pay-out
policies not based on realized capital gains, Rule 19b-1 actually creates an
inappropriate influence on portfolio management decisions by imposing pressure
to limit the realization of long-term capital gains to an annual total that is a
small fraction of an Applicant's net investment income and short-term capital
gains. In this situation, given the difficulties of distribution, Rule 19b-1 may
create an alternative pressure to ensure that gains will be short-term rather
___________________
(11) See Report at 194-95.
16
than long-term, and therefore not subject to Rule 19b-1's limitation on the
number of long-term capital gains, which would be an equally inappropriate
influence on portfolio management decisions. Accordingly, Rule 19b-1, when
applied to a fixed distributions policy not based on realized capital gains,
ironically gives rise to one of the concerns - inappropriate influence on
portfolio management decisions - that the Rule was designed to avoid. In
addition, if the requested exemptive relief is granted, the shareholders of each
Fund that adopts a Distribution Policy may benefit from the continued investment
of monies, which might otherwise have been distributed as a return of capital in
order to meet the Fund's dividend requirements under the Distribution Policy,
because the Fund will be able to retain such amounts to the extent that
long-term capital gains are available and are appropriately distributed
throughout the year in satisfaction of the respective Distribution Policy.
No purpose would appear to be served by the distortion in the intended
operation of the Distribution Policies required in order to comply with Rule
19b-1. There is no reason for requiring return of capital distributions on the
Funds' common stock beyond what is necessary to make up any shortfall between
each Fund's annual distribution requirements under a Distribution Policy and its
net investment income and capital gains, or for forcing the Funds to either pay
out more than is called for by their Distribution Policies or to retain (and pay
taxes on) long-term capital gains to an extent greater than would otherwise be
the case and creating potential compliance problems under Revenue Ruling 89-81.
The desirability of avoiding these anomalous results creates pressure to limit
the realization of long-term capital gains by a Fund when to do so would be
counter to investment considerations. As a result, gains may not be realized or
they may be
17
realized as short-term, rather than long-term, gains. The Order requested by the
Applicants would minimize these anomalous effects of Rule 19b-1 by enabling the
Funds, subject to the conditions of the Order, to realize long-term capital
gains as often as investment considerations dictate without fear of violating
Rule 19b-l.
E. Other concerns leading to adoption of Rule 19b-1 are not applicable.
Another concern that led to the enactment of Section 19(b) of the Act and
adoption of Rule 19b-1 was that frequent capital gain distributions could
facilitate improper fund sales practices including, in particular, the practice
of urging an investor to purchase shares of a fund on the basis of an upcoming
capital gain dividend ("selling the dividend"), where the dividend results in an
immediate corresponding reduction in net asset value and is in effect a taxable
return of the investor's capital. However, by paying out periodically a portion
of the capital gains that have occurred, the Funds' periodic pay-out policies
will help avoid the buildup of large end-of-the-year distributions and
accordingly help to avoid the scenario in which an investor acquires shares that
are subject to a large upcoming capital gains dividend.
The Applicants also submit that the "selling the dividend" concern is not
applicable to preferred stock, which entitles a holder to a specified periodic
dividend and no more and, like a debt security, is initially sold at a price
based upon its liquidation preference, credit quality, dividend rate and
frequency of payment. Investors buy preferred stock for the express purpose of
receiving specific payments at the frequency bargained for, and the application
of Rule 19b-1 to preferred stock may be contrary to the expectation of such
investors. There is also currently a tax rule designed to prevent investors from
selling the dividend, which provides that any loss on a share held for six
18
months or less that is attributable to a long-term capital gain dividend must be
treated as a long-term capital loss.(12)
F. General matters.
A Fund's Distribution Policy with respect to its common stock and any
Distribution Policy with respect to preferred stock of the Fund, if applicable,
will not be related to one another in any way other than that a Fund's ability
to comply with the requirements of Revenue Ruling 89-81 may possibly be enhanced
if the Order is granted with respect to both its common stock and preferred
stock. A Fund's Distribution Policy with respect to its common stock will be
initially established and reviewed at least annually in light of the Fund's
performance by its Board. No Fund is required to adopt a Distribution Policy,
and each Fund that does adopt such a policy may change or abandon it any time at
the discretion of the Fund's Board.
The relief requested would provide the Funds with flexibility in meeting
investor interest in particular kinds of funds, such as the Applicant Funds, and
in receiving predictable, fixed-rate distributions. In addition, as noted above,
implementation of the relief would actually ameliorate certain concerns that
gave rise to Section 19(b) and Rule 19b-1 and help avoid the "selling the
dividend" problem, which Section 19(b) and Rule 19b-1 do not prevent.
In summary, Rule 19b-1, in the circumstances referred to above, distorts
the effective and proper functioning of a Distribution Policy that may be
adopted by a Fund for its common stock (and any specific periodic payment
policies adopted for its preferred stock) and gives rise to the very pressures
on portfolio management decisions
_____________________
(12) See Section 852(b)(4) of the Internal Revenue Code of 1986.
19
that Rule 19b-1 was designed to avoid. These distortions forced by Rule 19b-1 in
this context would appear to serve no purpose and are not in the best interests
of shareholders. The Applicant Funds' Board believes that obtaining the
exemptive relief requested is in the best interests of the Funds' shareholders.
IV. APPLICANTS' CONDITIONS.
Applicants agree that, with respect to each Fund seeking to rely on the order,
the order granting the requested relief with respect to any Fund's common stock
will be subject to each of the following conditions with respect to such common
stock:
(1) Compliance Review and Reporting:
A Fund's Chief Compliance Officer will (a) report to the Fund's Board,
no less frequently than once every three months or at the next regularly
scheduled quarterly board meeting, whether (i) the Fund and the Fund's
Adviser have complied with the conditions in the Order, and (ii) a Material
Compliance Matter, as defined in Rule 38a-l(e)(2) under the Act, has
occurred with respect to compliance with such conditions; and (b) review
the adequacy of the policies and procedures adopted by the Fund's Board no
less frequently than annually.
(2) Disclosures to Fund Shareholders:
(a) Each 19(a) Notice to the holders of the Fund's common stock, in
addition to the information required by Section 19(a) and Rule 19a-1:
(i) will provide, in a tabular or graphical format:
(1) the amount of the distribution, on a per common share
basis, together with the amounts of such distribution amount, on
a per common share basis and as a percentage of such distribution
amount, from
20
estimated: (A) net investment income; (B) net realized short-term
capital gains; (C) net realized long-term capital gains; and (D)
return of capital or other capital sources;
(2) the fiscal year-to-date cumulative amount of
distributions on a per common share basis, together with the
amounts of such cumulative amount, on a per common share basis
and as a percentage of such cumulative amount of distributions,
from estimated: (A) net investment income; (B) net realized
short-term capital gains; (C) net realized long-term capital
gains; and (D) return of capital or other capital source;
(3) the average annual total return in relation to the
change in NAV per share of common stock for the 5-year period
(or, if the Fund's history of operations is less than five years,
the time period commencing immediately following the Fund's first
public offering) ending on the last day of the month prior to the
most recent distribution declaration date compared to the current
fiscal period's annualized distribution rate expressed as a
percentage of NAV as of the last day of the month prior to the
most recent distribution declaration date; and
(4) the cumulative total return in relation to the change in
NAV from the last completed fiscal year to the last day of the
month prior to the most recent distribution declaration date
compared to the fiscal year-to-date cumulative distribution rate
expressed as a percentage of NAV as of
21
the last day of the month prior to the most recent distribution
declaration date(13);
Such disclosure shall be made in a type size at least as large and as prominent
as the estimate of the sources of the current distribution; and
(ii) will include the following disclosure:
(1) "You should not draw any conclusions about the Fund's
investment performance from the amount of this distribution or from
the terms of the Fund's Distribution Policy.";
(2) "The Fund estimates that it has distributed more than its
income and net realized capital gains; therefore, a portion of your
distribution may be a return of capital. A return of capital may
occur, for example, when some or all of the money that you invested in
the Fund is paid back to you. A return of capital distribution does
not necessarily reflect the Fund's investment performance and should
not be confused with `yield' or `income.' ";(14) and
(3) "The amounts and sources of distributions reported in this
19(a) Notice are only estimates and are not being provided for tax
reporting purposes. The actual amounts and sources of the amounts for
tax reporting purposes will depend upon the Fund's investment
experience during the remainder of its fiscal year and may be subject
to changes
______________
(13) A Fund will reflect the total return and distribution rate expressed as a
percentage of NAV on a cumulative basis for the current fiscal year to the last
day of the month prior to the most recent distribution declaration date and not
annualized.
(14) The disclosure in this condition 2(a)(ii)(2) will be included only if the
current distribution or the fiscal year-to-date cumulative distributions are
estimated to include a return of capital.
22
based on tax regulations. The Fund will send you a Form 1099-DIV for
the calendar year that will tell you how to report these distributions
for federal income tax purposes.";
Such disclosure shall be made in a type size at least as large as and as
prominent as any other information in the 19(a) Notice and placed on the same
page in close proximity to the amount and the sources of the distribution;
(b) On the inside front cover of each report provided to shareholders under
Rule 30e-1 under the Act, a Fund will:
(i) describe the terms of the Distribution Policy (including the fixed
amount or fixed percentage of the distributions and the frequency of the
distributions);
(ii) include the disclosure required by condition 2(a)(ii)(1) above;
(iii) state, if applicable, that the Distribution Policy provides that
the Fund's Board may amend or terminate the Distribution Policy at any time
without prior notice to Fund shareholders; and
(iv) describe any reasonably foreseeable circumstances that might
cause the Fund to terminate the Distribution Policy and any reasonably
foreseeable material consequences of such termination; and
(c) Each report provided to shareholders under Rule 30e-1 under the Act and
each prospectus filed with the Commission on Form N-2 under the Act will provide
the Fund's total return in relation to changes in NAV in the financial
highlights table and in any discussion about the Fund's total return.
23
(3) Disclosure to Shareholders. Prospective Shareholders and Third Party
Information Providers:
(a) A Fund will include the information contained in the relevant 19(a)
Notice, including the disclosure required by condition 2(a)(ii) above, in any
written communication, other than a communication on Form 1099, about the
Distribution Policy or distributions under the Distribution Policy by the Fund,
or agents that the Fund has authorized to act on the Funds' behalf, to any Fund
common shareholder, prospective common shareholder, or third-party information
provider;
(b) A Fund will issue, contemporaneously with the issuance of any 19(a)
Notice, a press release containing the information contained in such 19(a)
Notice and will file with the Commission the information contained in such 19(a)
Notice, including the disclosure required by condition 2(a)(ii) above, as an
exhibit to its next filed Form N-CSR; and
(c) A Fund will post prominently on its (or the Adviser's) website a
statement containing the information in each 19(a) Notice, including the
disclosure required by condition 2(a)(ii) above, and will maintain such
information on such website for at least 24 months.
(4) Delivery of 19(a) Notices to Beneficial Owners:
If a broker, dealer, bank, or other person ("financial intermediary") holds
common stock issued by a Fund in nominee name, or otherwise, on behalf of a
beneficial owner, the Fund: (a) will request that the financial intermediary, or
its agent, forward the 19(a) Notice to all beneficial owners of the Fund's
shares held through such financial intermediary; (b) will provide, in a timely
manner, to the financial intermediary, or its
24
agent, enough copies of the 19(a) Notice assembled in the form and at the place
that the financial intermediary, or its agent, reasonably requests to facilitate
the financial intermediary's sending of the 19(a) Notice to each beneficial
owner of Fund shares; and (c) upon the request of any financial intermediary, or
its agent, that receives copies of the 19(a) Notice, will pay the financial
intermediary, or its agent, the reasonable expenses of sending the 19(a) Notice
to such beneficial owners.
(5) Additional Board Determinations for Funds Whose Common Stock Trades at
a Premium: If:
(a) A Fund's common stock has traded on the stock exchange that it
primarily trades on at the time in question at an average premium to NAV equal
to or greater than 10%, as determined on the basis of the average of the
discount or premium to NAV of the Fund's common stock as of the close of each
trading day over a 12-week rolling period (each such 12-week rolling period
ending on the last trading day of each week); and
(b) A Fund's annualized distribution rate for such 12-week rolling period,
expressed as a percentage of NAV as of the ending date of such 12-week rolling
period, is greater than the Fund's average annual total return in relation to
the change in NAV over the 2-year period ending on the last day of such 12-week
rolling period;
then:
(i) At the earlier of the next regularly scheduled meeting or within
four months of the last day of such 12-week rolling period, the Board,
including a majority of the Independent Trustees:
(1) will request and evaluate, and the Fund's adviser will
furnish, such information as may be reasonably necessary to make an
25
informed determination of whether the Distribution Policy on the
Fund's common stock should be continued or continued after amendment;
(2) will determine whether continuation, or continuation after
amendment, of the Distribution Policy is consistent with the Fund's
investment objective(s) and policies and in the best interests of the
Fund and its shareholders, after considering the information in
condition 5(b)(i)(1) above, including, without limitation:
(A) whether the Distribution Policy is accomplishing its
purpose(s);
(B) the reasonably foreseeable material effects of the
Distribution Policy on the Fund's long-term total return in relation
to the market price and NAV of the Fund's common shares; and
(C) the Fund's current distribution rate on its common stock, as
described in condition 5(b) above, compared to the Fund's average
annual taxable income or total return over the 2-year period, as
described in condition 5(b), or such longer period as the Fund's Board
deems appropriate; and
(3) based upon that determination, will approve or disapprove the
continuation, or continuation after amendment, of the Distribution
Policy; and
(ii) The Board will record the information considered by it, including
its consideration of the factors listed in condition 5(b)(i)(2) above, and
the basis for its approval or disapproval of the continuation, or
continuation after
26
amendment, of the Distribution Policy in its meeting minutes, which
must be made and preserved for a period of not less than six years from the
date of such meeting, the first two years in an easily accessible place.
(6) Public Offerings: A Fund will not make a public offering of its
common stock other than:
(a) a rights offering below NAV to holders of the Fund's common stock;
(b) an offering in connection with a dividend reinvestment plan,
merger, consolidation, acquisition, spin-off or reorganization of the Fund;
or
(c) an offering other than an offering described in conditions 6(a)
and 6(b) above, unless, with respect to such other offering:
(i) the Fund's annualized distribution rate for the six months
ending on the last day of the month ended immediately prior to the
most recent distribution declaration date(15), expressed as a
percentage of NAV per share as of such date, is no more than 1
percentage point greater than the Fund's average annual total return
for the 5-year period ending on such date(16); and
(ii) the transmittal letter accompanying any Fund's registration
statement filed with the Commission in connection with such offering
discloses that the Fund has received an order under Section 19(b) to
permit it to make periodic distributions of long-term capital gains
with respect to its common stock as frequently as twelve times each
year, and as frequently as distributions are
______________
(15) If the Fund has been in operation
fewer than six months, the measured period will begin immediately following the
Fund's first public offering.
(16) If the Fund has been in operation fewer than five years, the measured
period will begin using the NAV immediately following the Fund's first public
offering.
27
specified by or determined in accordance with the terms of any
outstanding preferred stock as such Fund may issue.
(7) Amendments to Rule 19b-1:
With respect to relief granted hereunder applicable to the Funds'
common stock, the requested Order will expire on the effective date of
any amendment to Rule 19b-1 that provides relief permitting certain
closed-end investment companies such as the Funds to make periodic
distributions of long-term capital gains with respect to their
outstanding common stock as frequently as twelve times each year.
V. APPLICABLE PRECEDENT.
The Commission has granted relief substantially similar to that applied for
herein on several recent occasions. See, ING Clarion Real Estate Income Fund, et
al., Investment Company Act Rel Nos. IC-28329 (July 8, 2008) (notice) and
IC-28352 (August 5, 2008) (order) (order permitting closed-end investment
companies to make periodic distributions of long-term capital gains with respect
to their outstanding common stock as frequently as twelve times each year and as
frequently as distributions are specified in the terms of any outstanding
preferred stock) and The Mexico Fund, et al., Investment Company Act Rel Nos.
IC-28332 (July 17, 2008) (notice) and IC-28357 (August 12, 2008) (order) (order
permitting a closed-end investment company to make periodic distributions of
long-term capital gains with respect to its outstanding common stock as
frequently as twelve times each year).
VI. PROCEDURAL COMPLIANCE.
At meetings duly held on July 26, 2007, with respect to MFS Government
Markets Income Trust, and October 23, 2007, with respect to MFS Intermediate
Income
28
Trust, the Board of the Applicant Funds adopted the following resolution
authorizing the execution and filing of this Application.
RESOLVED, that the filing of an application with the U.S.
Securities and Exchange Commission and any amendments to such
application, in the name of and on behalf of the Trust,
pursuant to Section 6(c) of the Investment Company Act of
1940, as amended (the "1940 Act"), seeking exemptive relief
for the Trust from the provisions of Section 19(b) of the 1940
Act and Rule 19b-1 promulgated thereunder, be, and it hereby
is, approved.
Pursuant to Rule 0-2(c) under the Act, each Applicant hereby states that
the person signing and filing this Application on its behalf is fully authorized
to do so, that under the provisions of the Declaration of Trust of such
Applicant responsibility for the management of the affairs of such Applicant is
vested in its Board, and that such Applicant has complied with all requirements
for the execution and filing of this Application in its name and on its behalf.
These verifications required by Rule 0-2(d) are attached to this
Application as Exhibit A.
Pursuant to Rule 0-2(f) under the Act, the Applicants further state that:
1. The address of each of the Applicants is as follows:
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
2. Any questions regarding this Application should be directed to:
Mark N. Polebaum, Esq.
Executive Vice President and General Counsel
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
AND
29
Gregory D. Sheehan, Esq.
Ropes & Gray LLP
One International Place
Boston, MA 02110-2624
VII. CONCLUSION.
On the basis of the foregoing, the Applicants respectfully request that the
Commission enter an order pursuant to Section 6(c) of the Act exempting the
Funds from the provisions of Section 19(b) of the Act and Rule 19b-1 thereunder
to permit each Fund to make distributions on its common stock consisting in
whole or in part of long-term capital gains as frequently as once per month so
long as it complies with the conditions of the Order and maintains in effect a
distribution policy with respect to its common stock calling for periodic
distributions of an amount equal to at least a fixed percentage of such Fund's
net asset value or market price per share of common stock or at least a minimum
fixed dollar amount per year. In addition, in order to comply with the terms of
any specified periodic payment policy with respect to the Funds' preferred
shares, if applicable, Applicants also request an order pursuant to Section 6(c)
of the Act exempting the Funds from the provisions of Section 19(b) of the Act
and Rule 19b-1 thereunder to permit each Fund to make distributions on any
series of its preferred stock consisting in whole or in part of long-term
capital gains as frequently as specified by or pursuant to the terms of such
series so long as it complies with the conditions of the Order and so long as it
maintains in effect a distribution policy with regard to such series of
preferred stock calling for periodic dividends in an amount equal to a specified
percentage, whether such specified percentage is determined at the time such
preferred stock is initially issued, pursuant to periodic remarketings or
auctions or otherwise.
* * * *
30
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
By: SUSAN NEWTON
Name: Susan Newton
Title: Assistant Secretary
Date:
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By: MARK N. POLEBAUM
Name: Mark N. Polebaum
Title: Executive Vice President and General
Counsel
Date:
31
LIST OF EXHIBITS
Exhibit A
1. Verification of MFS Government Markets Income Trust and MFS
Intermediate Income Trust
2. Verification of Massachusetts Financial Services Company
Exhibit B - Board of Trustees Resolution
32
EXHIBIT A-1
VERIFICATION
The undersigned states that she has duly executed the foregoing Application for
and on behalf of MFS Government Markets Income Trust and MFS Intermediate Income
Trust (the "Funds"); that she is the Assistant Secretary of the Funds; and that
all actions by trustees and other persons necessary to authorize the undersigned
to execute and file such Application have been taken. The undersigned further
states that she is familiar with the Application, and the contents thereof, and
that the facts set forth therein are true to the best of her knowledge,
information, and belief.
SUSAN NEWTON
Susan Newton
Assistant Secretary
33
EXHIBIT A-2
VERIFICATION
The undersigned states that he has duly executed the foregoing Application for
and on behalf of Massachusetts Financial Services Company ("MFS"); that he is an
Executive Vice President and the General Counsel of MFS; and that all actions by
trustees and other persons necessary to authorize the undersigned to execute and
file such Application have been taken. The undersigned further states that he is
familiar with the Application, and the contents thereof, and that the facts set
forth therein are true to the best of his knowledge, information, and belief.
MARK N. POLEBAUM
Mark N. Polebaum
Executive Vice President and General Counsel
34
EXHIBIT B
Authority to Apply for SEC Exemptive Relief
RESOLVED, that the filing of an application with the U.S.
Securities and Exchange Commission and any amendments to such
application, in the name of and on behalf of the Trust,
pursuant to Section 6(c) of the Investment Company Act of
1940, as amended (the "1940 Act"), seeking exemptive relief
for the Trust from the provisions of Section 19(b) of the 1940
Act and Rule 19b-1 promulgated thereunder, be, and it hereby
is, approved.
35